How Much Should U.S. Spend to Reach Last Two Percent of U.S. Homes with Broadband?

How prudent should we be to spend “whatever it takes” to provide terrestrial broadband access to every single U.S. home? Perhaps more concretely, does it make sense to spend up to $50,000 per home to provide such service to less than 200,000 locations, when at least two other approaches are already available?

Does it make sense to do so, when the alternatives already offer speeds three times what the Federal Communications Commission has said is necessary as part of the U.S. National Broadband Plan?

The problem dates back a couple of years, when an FCC gap analysis suggested $13.4 billion in subsidies would be required to expand availability to only 250,000 of the highest cost homes (0.19 percent of all U.S. homes).

According to the FCC, those homes would require subsidies of about $53,600 – on top of what service providers would expect to spend to connect a typical home.

Excluding the cost of serving these 250,000 homes, the cost of connecting the remaining 6.75 million homes would entail a subsidy of about $1,500 per home passed.

The issue is not whether it is a matter of good public policy to ensure that virtually all U.S. homes have access to broadband service; the issue is what is reasonable and prudent – especially at a time when the United States is virtually bankrupt – to spend sums of that sort when other alternatives offering three times the speeds envisioned by FCC cost scenarios are already made available on the market.

Keep in mind that the “broadband gap” affects less than five percent of U.S. homes. The Federal Communications Commission itself estimates that seven million U.S. households do not have access to terrestrial broadband service, representing about 5.4 percent of the 129 million U.S. homes.

Additionally, analysis assumes those households actually are occupied, but they are not. Some percentage is unoccupied, and some are used only partly as vacation homes.

According to the U.S. Census Bureau, about 18 million of the 130 million units are not occupied (about 14 percent).

On average, the gap estimated by the Commission is $3,357 per home passed, note Dr. George Ford, Phoenix Center chief economist, and Lawrence J. Spiwak, Phoenix Center president.

Even the then director of the National Broadband Plan, Blair Levin, said it will be too expensive to provide service to the last two percent of home using terrestrial facilities. Therefore, those homes should be served by satellite broadband.

A more reasonable approach to satellite broadband at the time might have been that if it costs $50,000 to provide a 4:1 Mbps terrestrial broadband service to a household, then is it reasonable to accept a “lower” service level by a network that already reaches those locations?

The situation has also changed since that analysis. ViaSat’s “Exede” satellite broadband service already has been offering speeds up to 12 Mbps downstream and up to 3 Mbps upstream, for $50 per month, since early 2012.

The HughesNet service, which has launched a new satellite of its own, will begin offering faster service beginning this month. Since both the ViaSat and HughesNet services use exactly the same satellites, it would be reasonable to assume that HughesNet will offer speeds comparable to that of Exede.
In fact, the National Broadband Plan explicitly recognized that the cost of ubiquitous coverage of terrestrial broadband could not be justified and furthermore recommended the use of “satellite broadband” as an alternative, as it is ubiquitously available, Phoenix Center argues.

The cost picture has changed dramatically since the FCC conducted its gap analysis. Though the original plan called for a 4 Mbps capability, Exede already sells a 12-Mbps service for $50 a month. As of Aug. 13, 2012, Hughesnet has not announced firm pricing and speeds.

But there is no reason to believe HughesNet will offer speeds any less than offered by Exede. The point is that by spending an abundance of money, the government simply does not make sense at the margin.